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The Inverted Hammer Candlestick

The Inverted Hammer Candlestick is a bullish reversal candlestick charting pattern, and it has the same form as a Shooting Star, with its long upper shadow and small real body at the lower end of the range.

The difference between the two being is that the inverted hammer comes after a decline.

Since the Inverted Hammer formation is a bullish reversal signal, it must come after a falling trend.

Identification:

Small real body at the lower end of the trading range and can be black or white

Upper shadow usually no more than twice as long as the real body

No (or almost no) lower shadow

What it signals:

As the market opens below the close of the previous day, the bulls rally briefly, but not enough to close above the previous day’s close.

As this leaves short sellers in a losing position, the Inverted Hammer presents the potential for an upcoming rally.

This is because those short sellers start to "cover their shorts", or buy back their shares, putting upwards pressure on the share price.

Confirmation of the trend reversal would by an opening above the body of the Inverted Hammer on the next trading day.

If the open and the close are identical, the indicator is considered a Gravestone Doji. The Gravestone Doji has a higher reliability associated with it than an Inverted Hammer.

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Conclusion

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As with all candlestick charts and patterns, this should be used with other technical analysis tools to further confirm its effectiveness.